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Revenues of $12.37 billion increased 27.9% from the year-ago quarter. The Zacks Consensus Estimate was pegged at $12.33 billion.

In local currency, adjusted earnings were RMB2.07 and revenues were RMB84.89 billion.

Notably, its shares lost 3.5% to close at $45.26 on Mar 22, following the release of the latest earnings. The decline was likely due to lower fourth-quarter 2018 margins as a result of increased spending.

Moreover, shares of Tencent have lost 18.1% over the past year compared with the industry's decline of 8.6% in the same period.

Quarter Details

Value Added Services (VAS) revenues (51.4% of total revenues) increased 9.3% year over year to RMB43.65 billion.

Social networks revenues increased 25% year over year to RMB19.5 billion owing to revenue growth from video streaming subscriptions and live broadcast services. However, online games revenues declined 1% year over year to RMB24.2 billion.

Online advertising revenues (20.1% of total revenues) increased 37.8% year over year to RMB17 billion.

Social and other advertising revenues increased 44% year over year to RMB11.8 billion due to ad revenue growth from QQ KanDian, Weixin Moments and Mini Programs.

Mini Programs’ daily visits per user increased 54% year over year and total active users surged more than more than 250% year over year. Additionally, the number of Weixin Pay transactions increased 80% year over year in the reported quarter due to easily deployable QR code solutions.

Additionally, media ad revenues increased 26% year over year to RMB5.2 billion owing to growth from Tencent video and Tencent news.

Others (28.5% of total revenues) surged 71.9% year over year to RMB24.2 billion. This was primarily due to increased revenues from FinTech and cloud services. Higher revenues from film and television businesses also aided results.

Notably, paying cloud customers more than doubled from the year-ago period in the reported quarter. The company launched Infrastructure as a service (IaaS) and Platform as a service (PaaS) products in fourth quarter.

In October 2018, Tencent brought a change in its strategy to expand its strength in consumer Internet and secure opportunities in industrial Internet. Additionally, the company increased its market position in social, games, digital content and payment with higher investments in technology and innovation.

Other Business Highlights

Communication and Social

Weixin and WeChat had combined monthly average users (MAUs) of 1,098 million at the end of 2018, up 11% year over year. Notably, WeChat Work, designed for enterprises for use in both internal communication and with customers is now used by about 80% of top 500 companies in China. Additionally, the application allows enterprises to gain analytical insights into customer data, which is a positive.

Moreover, QQ MAUs increased to 807 million by 2018 end. Improved features and diverse content offerings helped the company increase user time spent on the platform. Notably, daily video views for QQ KanDian, a news feed service, surged more than 300% year over year.

Online Games

Tencent released nine licensed games in the reported quarter. After the industry regulator started re-issuing the game monetization license from December 2018, eight of the company’s games (7 smartphone games and 1 PC game) have gained approval so far.

Tencent noted that rise in active users increased its smartphone games market share in China. This apart, internationally PUBG MOBILE was the most popular game on the basis of MAU and it was also named the Best Game of 2018 by Google Play.

However, PC revenues decreased 13% year over year to RMB11.2 billion in the reported quarter owing to user shift toward handheld devices.

Nevertheless, user time spent on League of Legends’ increased after Tencent introduced its first season pass. Additionally, game active users witnessed sequential growth after “China team won the World Championship in November 2018.” Moreover, the company released Iris Fall and Bladed Fury, internally developed PC games, to cater to the niche market.

Digital Content

Growth in video and music subscriptions aided VAS subscriptions, which increased 19.1% year over year to 160.3 million. Premium content and cross-promotions boosted video subscriber growth, which grew 58% year over year to 89 million. Notably, video views per daily average user (DAU) increased more than 40% year over year.

Tencent, which distributes 40 top global sports IPs to its users in various forms like short videos, live programs and news feeds, is the leading sports platform in China. Users can access its sports content across Tencent Sports, Tencent News, Tencent Video, Mobile QQ Browser and WeiShi.

Operating Details

Gross profit increased 11.6% year over year to RMB35.15 billion. However, gross margin decreased 600 basis points (bps) year over year to 41.4%.

Selling and marketing expenses declined 4.8% year over year to RMB5.7 billion. However, general and administrative expenses increased 28.8% year over year to RMB11.35 billion.

Adjusted EBITDA increased 18.2% year over year to RMB29.7 billion. However, adjusted EBITDA margin decreased 290 bps year over year to 35%.

Non-GAAP operating profit increased 2.4% year over year to RMB22.39 billion. However, operating margin declined 650 bps to 26.4% year over year.

Balance Sheet & Cash Flow

Tencent exited the quarter with cash and cash equivalents of RMB97.81 billion compared with RMB105.39 billion as of Sep 30, 2018.

As of Dec 31, 2018, cash used in operating activities was $3.1 million against cash flow from operations of $8.1 million in the year-ago period.

Operating cash flow in the reported quarter was RMB33.2 billion, up 16% year over year. Free cash flow in the same period increased 18% year over year to RMB28.6 billion.

Guidance

Tencent will invest in infrastructure and technology to expand in consumer Internet and secure opportunities in industrial Internet. The company noted that it will strengthen its game portfolio with both internal developments and external partnerships.

Additionally, the company will expand FinTech solutions and its product portfolio to meet users’ needs. Moreover, Tencent’s cloud will provide customized solutions to its clients from industries including education, financial, healthcare, retail and transportation.

Long-term earnings growth rate for Autohome, The Meet Group and Akamai is projected to be 29%, 20% and 15%, respectively.

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